New Income Tax Bill can affect ULIPs policyholders; here's how

If you invest in Unit Linked Insurance Plans (ULIPs), you need to remain informed about recent tax changes. While the new tax regime does not offer investment exemptions, certain taxes may apply to your ULIP earnings.

Starting April 1, 2026, ULIPs with annual premiums exceeding ₹2.5 lakh will incur a 12.5% long-term capital gains (LTCG) tax on redemption after one year. Announced in the 2025 Budget, this move aligns ULIP taxation with equity-oriented mutual funds, promoting fairer tax treatment across investment options.

Earlier, investments made in high-premium ULIPs got tax exemptions under Section 10(10D) of the Act, making them a popular choice among investors seeking tax benefits. However, the revised tax regulations now clarify the taxation of ULIPs, specifically for policies issued after February 1, 2021, where annual premiums exceed ₹2.5 lakh.

DR. Mukesh Jindal, Senior Partner at Alpha Capital, said, "ULIPs have long been seen as an investment and insurance combo, but the new tax bill changes the game. If your ULIP premium is over ₹2.5 lakh per year, it will no longer qualify for tax-free maturity benefits under Section 10(10D). Instead, the gains will be taxed under capital gains, just like equity mutual funds."

"This makes it even more important to separate your insurance from your investments. If your goal is financial security for your family, a term insurance policy is a smarter and more affordable choice. If you’re looking to grow your wealth, equity mutual funds offer lower costs, greater flexibility, and better returns compared to ULIPs, which come with additional insurance-related expenses," he added.

This change aligns ULIPs with equity-oriented mutual funds. If held for over 12 months, ULIPs will be treated as long-term capital assets and taxed at 12.5%.

Prashant Mishra founder and CEO at Agnam Advisors, echoed similar views: "The key change in the new tax bill is the classification of high-premium ULIPs as 'capital assets,' making their gains taxable under capital gains—just like equity mutual funds. This reinforces a fundamental financial principle: insurance and investment should never be clubbed together."

Therefore, experts suggest when you need life insurance, opt for a term plan; when you want to invest, choose mutual funds. Mutual funds may offer better cost efficiency, greater liquidity, and potentially higher returns without the high charges associated with ULIPs. However, investors should review their ULIPs—if they exceed the ₹2.5 lakh premium limit, reconsider their financial strategy for a more tax-efficient and flexible approach.

Thus, if you already own a ULIP, take a moment to review your policy. With these tax changes, now is the time to ensure your financial plan is both tax-efficient and effective.